The final week of what's shaping up to be a "black October" promises to be volatile and even scary.
Yet traders are also holding out hope that October will be the month where stocks finally hit bottom, even if it means another stinging downdraft before it's over.
The health of credit markets and the global economy will influence stocks in the week ahead. For the U.S. market, there are earnings and a heavy calendar of economic news. The highlight is the Federal Reserve's two day meeting, expected to end Wednesday with a half point rate cut.
About a quarter of S&P 500 companies report, including big oil, and the economic data to watch is the first look at third quarter GDP, expected to be weak but not nearly as week as the current fourth quarter. General Motors' merger talks with Chrysler could come to a head in the coming week, determining the future shape of the U.S. auto industry and tens of thousands of jobs.
Investors will also focus on the final full week of campaigning before the presidential election Nov. 4.
Stocks have now lost more than 30 percent in the past five weeks. The Dow in the last week lost 473 points or 5.3 percent to 8378, the lowest close since April, 2003. The S&P 500 tumbled 6.78 percent to 876, while the Nasdaq shed 9.3 percent to 1552, both at the lowest closing levels since spring, 2003.
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"One has to remain as objective as one can in this environment and watch different indicators and see what begins to change," said Merrill Lynch chief investment strategist Richard Bernstein. "Everyone and his brother has tried to pick the bottom, and they've all suffered as a result. They may be right in the next 15 years and that's fine, but I don't think there's going to be medals given out for being the first one in."
Bernstein said the stock market is reacting now to the sagging economy which may need another stimulus package from Washington to help it pick up. "What's happening is the market is telling us that this is not a financial problem. It's an economic problem, and you can't solve an economic crises of this magnitude purely based on monetary policy or monetary actions, and it's unlikely you'll see any kind of fiscal action until next year" said Bernstein.
The idea of a second, more sweeping stimulus package has been discussed in Washington and on the campaign trail. On Wall Street, stimulus is increasingly mentioned as a necessary measure to preserve jobs and prevent the consumer from being completely derailed.
"While everyone is talking about the TED spread and watching the spreads, our point is that you want to watch weekly jobless claims," he said. In the past week alone, corporations announced the layoff of thousands as workers, a trend economists expect to accelerate in the first part of next year.
"Regardless of who wins (the presidency), I think the thing to watch is if the Democrats win 60 seats or not," he said. "...From day one, they'll worry about the midterm election in 2010, and they'll want the economy to be in an upswing." Bernstein said if Democrat Sen. Barack Obama, who currently leads in the polls, wins and the Democrats sweep the Senate, it's likely a stimulus package would be passed more quickly.
Bernstein said even with the current volatility and uncertainty, there are stocks he likes. Those sectors include consumer staples and health care. "We think those will be the leaders coming out of this. We also like old fashioned dividend paying utilities," he said. He also looks for stocks with high yields and strong cash flow.
"Things are changing. The dividend yield on the S&P is above 3 percent for the first time since 1992. Actually the dividend yield is within spitting distance of the 10 year note (yield), he said.
In the past week, the credit crunch showed some small signs of easing as Libor declined.
The dollar though gained a startling 6.5 percent to a level of $1.2585 against the euro. Against the yen, it lost 6.7 percent. As the dollar rose against some currencies, commodities sold off and global equities markets swooned.
The health of emerging market economies has become the latest phobia to grip investors. Worldwide, emerging stock markets tumbled. The South Korean stock market lost 20 percent for the week, while Bombay and Hong Kong each lost 13 percent. Argentina's Merval lost 27 percent last week.
The government bonds of emerging economies have lost 27.75 percent of their original price so far this year and 23.7 percent in October alone, according to Reuters.
In a note Friday, Merrill Lynch said it expects emerging markets fund redemptions to surge. In the week ended Oct. 22, Merrill analysts said just $753 million was taken from emerging markets equity funds.
Redemptions have been a major issue for U.S. stocks, as hedge funds and mutual funds sell to raise cash, a trend traders expect to continue.
The Fed is expected to slice another half point off its target Fed funds rate. "I don't think it will necessarily quell some of the anxiety," said Deutsche Bank chief economist Joseph LaVorgna.
He said GDP on Thursday and durable good orders are the big numbers to watch. He expects GDP to come in at minus 1.3 percent, but for the fourth quarter he sees negative 4.5 percent.
"It's mostly due to weaker consumer spending," said LaVorgna of the third quarter decline. In the first quarter of next year, he expects a 1 percent decline then a postiive half percent in the second quarter.
LaVorgna said one bright spot in an economy battling the credit crunch and the consumer pullback is the parallel drop in energy prices. Oil fell $7.98 or 11 percent to $64.15 in the past week, even as OPEC vowed to cut production.
"At least in the U.S., there is one important offset which could have some mild positive impact on the economy, and that is energy and energy prices. I think people underestimate the impact energy was having on the economy and will underestimate the positives lower energy prices will bring," he said. Just in the past week, gasoline at the pump dropped to an average $2.78 per gallon, a level not seen for a year.
"Our calculation is one penny on gasoline is equal to about $1 billion in household cash flow," he said. "...A one dollar movement in gasoline is worth about $100 billion in household cash flow. $100 billion in income is worth about three million jobs."
In other data, new home sales are reported Monday, and the S&P Case Shiller Home Price Index for August is reported Tuesday. Consumer confidence is reported Tuesday. Durable goods data is released Wednesday. Weekly jobless claims are reported Thursday. On Friday, personal income and spending, and the employment cost index are released, as is the Chicago PMI and consumer sentiment.
About a quarter of the S&P 500 report in the week ahead with major energy companies joining the list.
Major oil companies report in the week ahead. British Petroleum, Occidental, Valero are out on Tuesday. Hess, Tesoro and Murphy Oil report Wednesday. ExxonMobil, Marathon Oil and Royal Dutch Shell report Thursday, and Chevron releases its report Friday. (See below or more earnings on deck next week.)
Other companies reporting Monday include Verizon, FPL, Arch Coal and Lorillard. Estee Lauder, Interpublic, U.S. Steel, Whirlpool and SAP report Tuesday. Procter and Gamble, Aetna, Comcast, Corning, Kraft, Kellogg and Moody's are out on Wednesday. Colgate-Palmolive, CVS/Caremark, CBS, Barrick Gold, Motorola and Waste Management release earnings Thursday. On Friday, there are reports from Clorox, Cummins, Weyerhaeuser, and NYSE Euronext.